A Bearish Bias

A look at PMI figures across the world suggests the global economy is healing; however, there remain clear headwinds—like potentially higher interest rates, cautions Richard Rhodes, money manager and editor of The Rhodes Report.

Given this economic backdrop, and developing pressure on corporate revenues, margins, and earnings, we feel that risk is being misplaced at current levels.

The 14-day and 40-day models are now overbought. Now, the 14-day and 40-day are peaking, which would certainly indicate a correction stands as the highest probability.

The % of stocks above their 10-day moving average (dma) is at the 70%-level; still a major divergence with prices.

The % of stocks above their 200-dma stands at 77%. The 87% level marked previous highs. The 50-dma/150-dma cross breakdown now confirms a larger correction. Bottoms form between 30%-40%.

Overall, the risk-reward remains skewed to the downside, regardless of whether prices remain above trendline resistance, as our model group suggests a correction to the 110-day moving average, currently at S&P 1711.

A clear breakdown at that level would accelerate the decline towards the wide 200-dma and 380-dma range, between 1657-1571.

At this point, the % of stocks above their 10-dma and 200-dma continue to show major divergences, which means fewer stocks are participating in the rally, which is nearly always attached to -5% to -7% corrections at a minimum.

Also, the models have now peaked and are turning lower, which, in combination with the other models, argues rather strongly for continued weakness. The overriding bullish December seasonal may keep prices elevated a bit longer.

Once the taper begins, the Fed will move to remove it rather quickly, regardless of their "jawboning." They will take great pains to say that interest rates will remain low for an extended period of time, and they will be right.

In our opinion, the taper will come with a correction in stocks; the US dollar will falter, as money shall move from an arguably "overvalued" US stock market towards better relative value propositions in Europe and Asia. This is the "flipside" of momentum investing.

We remain short, via a position, the Russell 200 2X Short (TWM) as well as short positions in Tesla (TSLA) and Chipolte (CMG).